The Flamingo Corporation is trying to determine the effect of its inventory turnover ratio and DSO on its cash flow cycle. Flamingo's 2015 sales (all on credit) were $180,000, and it earned a net profit of 5 percent, or $9,000. The cost of goods sold equals 85 percent of sales. Inventory was turned over eight times during the year, and the DSO, or average collection period, was 36 days. The firm had fixed assets totaling $40,000. Flamingo's payables deferral period is 30 days.

Suppose Flamingo's managers believe that the inventory turnover can be raised to 10$\times$. What would Flamingo's cash conversion cycle, total assets turnover, and ROA have been if the inventory turnover had been 10$\times$ for 2015?

The Garvin Company is setting up a new checking account with Barngrover National Bank. Garvin plans to issue checks in the amount of $1.6 million each day and to deduct them from its own records at the close of business on the day they are written. On average, the bank will receive and clear (that is, deduct from the firm's bank balance) the checks at 5 p.m. the fourth day after they are written. For example, a check written on Monday will be cleared on Friday afternoon. The firm's agreement with the bank requires it to maintain a $1.2 million average compensating balance, which is $400,000 greater than the cash balance the firm would otherwise have on deposit. Garvin will make a $1.2 million cash deposit at the time it opens the account.

What ending daily balance should the firm try to maintain (1) on the bank's records and (2) on its own records?

The Garvin Company is setting up a new checking account with Barngrover National Bank. Garvin plans to issue checks in the amount of $1.6 million each day and to deduct them from its own records at the close of business on the day they are written. On average, the bank will receive and clear (that is, deduct from the firm's bank balance) the checks at 5 p.m. the fourth day after they are written. For example, a check written on Monday will be cleared on Friday afternoon. The firm's agreement with the bank requires it to maintain a $1.2 million average compensating balance, which is $400,000 greater than the cash balance the firm would otherwise have on deposit. Garvin will make a $1.2 million cash deposit at the time it opens the account.

How many days of float does Garvin carry?

The Garvin Company is setting up a new checking account with Barngrover National Bank. Garvin plans to issue checks in the amount of $1.6 million each day and to deduct them from its own records at the close of business on the day they are written. On average, the bank will receive and clear (that is, deduct from the firm's bank balance) the checks at 5 p.m. the fourth day after they are written. For example, a check written on Monday will be cleared on Friday afternoon. The firm's agreement with the bank requires it to maintain a $1.2 million average compensating balance, which is $400,000 greater than the cash balance the firm would otherwise have on deposit. Garvin will make a $1.2 million cash deposit at the time it opens the account.

Assuming that the firm makes cash deposits at 2 p.m. each day (and the bank includes them in that day's transactions), how much must it deposit daily to maintain a sufficient balance once it reaches a steady state? (To find the answer, set up a table that shows the daily balance recorded on the company's books and the daily balance at the bank until a steady state is reached.) Indicate the required deposit on Day 1, Day 2, Day 3, Day 4, and each day thereafter, if any, assuming that the company will write checks for $1.6 million on Day 1 and each day thereafter.

Green Thumb Garden Centers sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are 20 percent, and the cost of placing an order with its supplier is $25.

How often must the company order?

Green Thumb Garden Centers sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are 20 percent, and the cost of placing an order with its supplier is $25.

What will Green Thumb's average inventory be?

Green Thumb Garden Centers sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are 20 percent, and the cost of placing an order with its supplier is $25.

What is the maximum inventory that exists after an order is received?

Green Thumb Garden Centers sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are 20 percent, and the cost of placing an order with its supplier is $25.

What is the total inventory cost at the EOQ level?

Green Thumb Garden Centers sells 100,000 bags of lawn fertilizer annually. The optimal safety stock (which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are 20 percent, and the cost of placing an order with its supplier is $25.

What is the EOQ?

Helen Bowers, the new credit manager of the Muscarella Corporation, was alarmed to find that Muscarella sells on credit terms of net 50 days whereas industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of $3 million, Muscarella currently averages 60 days sales in accounts receivable. Bowers estimates that tightening the credit terms to 30 days would reduce annual sales to $2.6 million, but accounts receivable would drop to 35 days of sales, and the savings on investment in them should more than overcome any loss in profit.

Muscarella's variable cost ratio is 70 percent, and its marginal tax rate is 40 percent. If the interest rate on funds invested in receivables is 11 percent, should the change in credit terms be made? All operating costs are paid when inventory is sold.

Morrissey Industries sells on terms of 3/10, net 30. Total sales for the year are $900,000. Forty percent of the customers pay on Day 10 and take discounts; the other 60 percent pay, on average, 40 days after their purchases.

What would happen to average receivables if Morrissey tightened its collection policy with the result that all current nondiscount customers paid on Day 30?

Morrissey Industries sells on terms of 3/10, net 30. Total sales for the year are $900,000. Forty percent of the customers pay on Day 10 and take discounts; the other 60 percent pay, on average, 40 days after their purchases.

What is the average amount of receivables?

Morrissey Industries sells on terms of 3/10, net 30. Total sales for the year are $900,000. Forty percent of the customers pay on Day 10 and take discounts; the other 60 percent pay, on average, 40 days after their purchases.

What is the days sales outstanding?

The Saliford Corporation has an inventory conversion period of 60 days, a receivables collection period of 36 days, and a payables deferral period of 24 days.

What would happen to Saliford's cash conversion cycle if, on average, inventories could be turned over eight times a year?